As Inflation Persists, Look to Dividends, Quality and Currency Hedging

JThe July jobs report was released today, revealing that the United States created 528,000 new jobs, officially recouping the 22 million jobs lost at the start of the pandemic, the Wall Street Journal reported.

.Image source: Wall Street Journal

Unemployment also fell to 3.5%, a last low seen at the very beginning of 2020, before the pandemic. The participation rate fell in July from 62.2% in June to 62.1% in July, as the labor market continued to feel the losses of 623,000 workers in total, creating sustained wage pressures as the demand for workers remains high.

Wage growth is on the rise, beating analysts’ expectations with a 0.5% increase from June and a 5.2% rise from a year ago.

“From the Fed’s perspective, this report is saying, ‘let’s continue to press the political brake’ because inflation is uncomfortably high,” Greg Daco, chief economist at EY-Parthenon, told the WSJ.

As inflation persists, some economists expect more workers to return to the labor market due to the impact of higher prices on household budgets.

The Federal Reserve is not expected to meet again until September, leaving room for another round of monthly reports before it has to decide what kind of interest rate hike is needed to tame persistent inflation, but to At the moment, anticipation is high for another 75 basis points rise. Fed funds futures currently sit at a 67% chance of a 0.75% upside. On Thursday, those odds were just 34%.

“Today’s strength suggests the Fed is likely to proceed with another 75 basis point (bps) rate hike from here unless the CPI report comes out. shows dramatic weakness, which seems highly unlikely at this point,” Rick Rieder, CIO of global fixed income at BlackRock Inc. and head of BlackRock’s global allocation investment team, told MarketWatch.

Invest in quality international dividends with hedging

Tougher times are ahead for US investors and it could be a good time to look to international investments for diversification opportunities. At a time when the U.S. dollar is strong, exchange rates can play a significant role in reducing return potential, but the WisdomTree International Hedged Quality Dividend Growth Fund (IHDG) provides exposure to dividend-paying companies in the developed world, excluding the United States and Canada, while protecting against currency fluctuations.

IHDG seeks to track the WisdomTree International Hedged Quality Dividend Growth Index which consists of dividend paying companies that exhibit growth characteristics (excluding the US and Canada), while simultaneously hedging against a basket of currencies. The index is based on the top 300 companies (on average) in the WisdomTree International Equity Index that rank highest in terms of quality and growth factors. Factors highlighted include long-term earnings growth expectations, return on equity and return on assets.

The index weights companies based on dividends paid over the last annual cycle, with a higher weight going to companies with the highest total dollar dividends, and each security is capped at a 5% weight in the fund. while sectors and countries are capped at 20% (actual estate is capped at 15%).

The index’s currency hedging means that there should be higher returns when the US dollar is strong, compared to equivalent unhedged investments, and lower when the US dollar is weaker. The fund uses currency forwards or futures contracts to offset the impact of foreign currencies.

Top sectors in the fund include Health Care with an allocation of 20.82%, Industrials at 19.37%, Consumer Discretionary at 18.60%, Materials at 17.55%, Information Technology at 11.01% and many smaller sector allocations.

IHDG has an expense ratio of 0.58%.

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